Standing Committee B

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8) - Clause 12 - Employee securities: anti-avoidance

Question proposed [this day], That the clause stand part of the Bill. 
Question again proposed.

Dawn Primarolo: It is not my intention to stray into the important debates on amendments to schedule 2, but there has been some discussion about the scope of the proposal on employment-related securities in clause 12 and schedule 2, about which I spoke briefly to the hon. Member for Runnymede and Weybridge (Mr. Hammond). These arrangements are devised to deal with the minority of cases where there are complex, contrived arrangements to avoid paying income tax and national insurance on employment rewards. The Government have made clear their intention to close that activity down permanently.
There has been some debate about whether small businesses are caught by the provisions, so I am grateful to have the opportunity to offer small businesses some reassurance. 
A change being made to chapter 4 of the Income Tax (Earnings and Pensions) Act 2003 will remove, where avoidance is involved, the provision that automatically exempts benefits received in connection with securities from a full income tax and national insurance charge, if income tax has been paid elsewhere. I am aware, from representations made directly to me and my Department, that professionals have expressed concern about the possible scope of the change. I want to make it clear that this change does not bring all benefits derived from securities into a tax and national insurance charge. A reference to benefits in the context of the schedule means the employment reward—the passing of value to an employee in return for the employee's labour. Where investors are carrying out their normal investment transaction, this charge will not affect them. 
The purpose test introduced in section 447 of the 2003 Act has been carefully designed to target complex, contrived avoidance arrangements that are used mainly to disguise cash bonuses. If taxpayers use contrived arrangements to get round anti-avoidance legislation—to avoid paying the proper amount of tax and national insurance—they cannot expect to be excluded from the charge. However, it will be absolutely clear from what I say about the purpose test that this measure will not affect the taxation of those small businesses that do not use contrived schemes to disguise remuneration to avoid tax and national insurance. 
There is no connection between the changes proposed in this clause and schedule to tackle contrived avoidance schemes and last December's discussion paper on the taxation of small business, which focuses on the strategic issues relating to the taxation and treatment of the legal forms used by small businesses. Taxation of small businesses is a live issue that is being considered as part of our ongoing discussions with small businesses and their advisers. The provisions before the Committee today are not intended to address those points. Any proposals coming out of the discussion paper and further consideration will be brought before the House in the normal way. 
I am grateful to you, Sir Nicholas, for allowing me to spell that out. There has been some confusion, and many inquiries have been made about that point. I was asked to explain the purpose of clause 12 and schedule 2 at the beginning of the debate on them. Clause 12 and schedule 2 contain important and necessary measures, which I should address on a point-by-point basis in our discussions on the amendments to the schedule.

Philip Hammond: The Paymaster General is being extremely helpful. Will she confirm that what she is saying is that, with the exception of companies that fall within the scope of Inland Revenue 32, there is no intention to limit the ability to take profits in dividends within a business and to impute remuneration that is of another kind where profits are being taken as dividends?

Dawn Primarolo: I was trying to be as clear as possible. Unless a scheme falls within the category of schemes contrived specifically to avoid income tax and national insurance on employment remuneration for an employee, it is not within the scope of clause 12 or schedule 2. There are matters to be discussed, but that will take a long time. I know that this topic has caused a great deal of interest, and I thought it would be helpful to provide to the Committee at the beginning of our deliberations as clear an idea as possible of the precise, narrow and targeted aim of schedule 2 and clause 12, and thereby to put to rest concerns that have been generated in some quarters.

Nicholas Winterton: I have to make it clear that the Paymaster General was speaking in general terms to clause 12, but I felt it was worth her while doing so before we reached the nitty-gritty contained in the amendments to schedule 2.
Question put and agreed to. 
Clause 12 ordered to stand part of the Bill.

Schedule 2 - Employee securities: anti-avoidance

Mark Field: I beg to move amendment No. 1, in schedule 2, page 63, line 13, after 'is', insert
'entered into as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions and is'.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 2, in schedule 2, page 63, line 22, at end insert—
'(d) any contract of insurance offered by a company whose business includes the business of selling insurance policies where the contract is offered on substantially the same terms in the ordinary course of that insurance business.''.'. 
No. 3, in schedule 2, page 63, line 36, leave out from beginning to end of line 3 on page 64 and insert— 
'(8) This paragraph has effect on and after 2nd December 2004 and applies in relation to rights under contracts of insurance acquired on or after that date.'.

Mark Field: If we took at face value the Paymaster General's warm words it would be pointless having the debate that I suspect we shall have over the next hour or so. I accept that this is a complex area and that the Treasury has received many representations on it. The anti-avoidance proposals are set out in detail in schedule 2, which deals with employment remuneration. However, for our part, it is difficult to avoid the conclusion that many of the anti-avoidance proposals are driven by an increasingly desperate Treasury desire to fill its revenue black hole without regard to the damaging effect that it will have on the development of start-up ventures, and, indeed, of some bona fide remuneration schemes.
I am amused that there is such amusement coming from you, Sir Nicholas. I suspect it has nothing to do with what I have said—at least I hope that that is the case.

Nicholas Winterton: No, it was something I said that caused a certain flutter of the eyelids. I leave it on record that I find what has been said in no way offensive.

Mark Field: Notwithstanding the Paymaster General's warm words of a few moments ago, I believe that where these proposals do most damage is in the inadvertent bias against smaller companies and entrepreneurs, who will perhaps be unable to take the necessary complex accounting advice in setting up their employment security schemes. There is therefore a risk that they will come under the banner of being ''contrived''.
The arbitrary, uncertain and subjective nature of many of the proposals in schedule 2 betrays the sense that the all-important determination of whether a scheme is subject to capital gains tax, and therefore a 10 per cent. charge, or income tax, with a 41 per cent. charge, hinges on the random outcome of which tax office or officer is dealing with the file. 
We have learned that the Inland Revenue, as part of its clearance process, has in the past given smaller companies assistance in determining pay-as-you-earn liabilities and consideration on sale, but we understand that this may soon be discontinued. I hope that the Paymaster General will provide guidance on that. 
We would like assurances that in analysing the operation of the schedule proper attention will be paid to the entrepreneurial set ups that the much-vaunted capital gains tax regime was supposed to benefit most. We fear that these small operations have most to lose from the arbitrary element, which places the taxpayer at the whim of the Inland Revenue inspector, who can  decide whether moneys earned, and therefore liable for tax charge, are considered as remuneration or as a return on investment. 
We need to stress that, without falling foul of the Treasury's accusation of contrivance, it is inevitable that many smaller businesses will, from day one, structure themselves so as to have an exit strategy in sight. That is not wilful tax avoidance but the practical reality of commercial life. I ran a small business for seven years before I entered Parliament, and I remember that at the end of each tax year, when we went to see our accountant, we would consider the pot of moneys left in the company and determine whether we should take it out as some sort of dividend. We considered those issues—issues of, at one level, tax avoidance—fundamentally and from first principles. I do not think that those discussions with our accountant were contrivance in any way. None the less, I suspect that they would run the risk of falling foul of a clear definition, unless we are assured to the contrary by the Minister. If we are not, those schemes would no longer be seen as providing proper dividends, but would be subject immediately to the rather higher charge of income tax. 
It seems that the Government remain determined to close tax planning, rather than just tax contrivance, which reduces the PAYE and national insurance charge paid on salaries. Most measures have in the past been aimed at bonus payment structures, most visibly those implemented by large investment banks. No one on the Opposition Benches will defend the payment in wine, gold or in other ways that was clearly an abuse of the system. 
We are concerned that the impact may well cover securities issued by employee-controlled companies. There are concerns that there will be fewer fiscal incentives to reward employees in much smaller operations in ways that align their interests with employers. That simply cannot be the intention of what is being proposed under the schedule. 
Most of the structures being closed are being shut down following the introduction of the disclosure of tax avoidance schemes legislation. A main cause of these changes is the result of the Government having made capital gains tax treatment for individuals so much more attractive than income tax receipts by introducing the business asset taper relief in 1998. 
I come to the specifics of the first three amendments, Nos. 1 to 3, which relate to insurance contracts. On amendment No. 1, the Government claim that the measures relating to insurance contracts in paragraph 2 of schedule 2 are needed to counteract wilful tax avoidance. If that is so, it should not be objectionable to have a motive test—in other words, one that would look at the main purpose. It would have to be shown that the main purpose was the avoidance of taxation, and that is set out in our first amendment. 
These amendments seek to ensure that the new rules do not apply to contracts issued by insurance companies, who sell such contracts in the normal course of their business to the general public—that is set out in amendment No. 2—or to existing insurance  contracts that were in place on 2 December last year. That is our third amendment. 
The definition of securities in part 7 of the Income Tax (Earnings and Pensions) Act is widened to include certain instruments to prevent the Bill from being used to pay tax-free bonuses. They include rights under certain insurance contracts as well as redeemable shares, to which we shall return. 
The schedule already introduces a purposive test under paragraph 4(3). Accordingly, there seems little reason why the Government should object to the insertion of a main purpose test for insurance contracts. Naturally, the main problem with a main purpose test is the element of subjectivity. Inevitably, that leads to a potential for uncertainty, about which I am sure the Paymaster General will wax lyrical—at least, until the time comes to deal with paragraph 4(3). 
The purpose of amendment No. 2 is to exclude from the definition of employment-related securities contracts of insurance that are provided to employees by their employers, when those employers are insurance companies and provide contracts on the same terms to members of the public. As the Paymaster General will be aware, part 7 of the Income Tax (Earnings and Pensions) Act contains charges that relate to employment-related securities to charge to income tax gains from securities that are awarded to employees by reason of their employment. Employment-related securities include such items as shares and loan stock. We are worried—a concern that has been reiterated by the insurance business—that tax is being avoided by entering into similar arrangements with insurance contracts. We believe that there should be an additional exemption to protect employees from being offered insurance contracts by their employers, when those employers would offer those contracts to the public on the same terms. 
We tabled amendment No. 3 to prevent an unanticipated national insurance and PAYE liability for employers. As the Paymaster General is aware, the restricted securities regime came into place just more than two years ago on 16 April 2003. Under that regime, charges to income tax under PAYE and national insurance can arise when restrictions cease to apply to securities or when restricted securities are disposed of. Securities were not restricted by reason only, although they could be redeemed on payment of an amount. From last December—the reason why we set the date in the amendment—the exemption for redeemable securities is to be removed for securities that were issued before that date as well as on or after it. Our worry is that that is likely to lead inadvertently to a national insurance and PAYE liability for employers. The Association of British Insurers has been in touch with the Treasury about the issue and I hope that it will take account of what the association said. I should like the Paymaster General to give us some guidance on such matters and I look forward to hearing her comments.

Dawn Primarolo: I thought it important when responding to this first set of amendments this afternoon to attempt to make it crystal clear to the Committee the target of the arrangements under schedule 2. We are discussing employment-related income, of which some £1½ billion to £2 billion are paid to a small number of highly paid people in certain industries per year. I will not take long to explain matters, but I shall cite a few examples with dates. Systematically, over a long time, contrived schemes have been developed to ensure that those individuals do not pay national insurance and income tax on that employment-related income.
I defy any member of the Committee to parade before us higher rate taxpayers who do not understand that their employment-related income is subject to income tax and national insurance. Given the comments of the hon. Gentleman about small business, I shall give the Committee an example of an avoidance scheme. This is what happens. The employer pays the cash bonus into a bank and gets gilt futures in return, which he gives to the employee with a minor forfeitable condition. The employee transfers them to a special-purpose company that he already owns—let us call it Newco—in exchange for partly paid shares at a high premium, on call, equal to the amount of the bonus, plus a loan equal to the amount of the bonus. The employee then sells his shares in Newco to another, unrelated company—let us call it Purchaser—for their market value, which is very little as the gilt futures are matched with debt and the huge outstanding call on partly paid shares. 
Newco then calls on Purchaser to pay out the partly paid shares so that it can repay the loan to the employee. Purchaser is now worth the market value of the gilt futures. Newco then becomes unlimited to increase its distributable reserves, which are then distributed in specie so that the gilt futures end back with Purchaser. Purchaser refunds money to the bank by way of the gilt futures, and that completes the circle. In that way, the individual receives his bonus without paying tax or national insurance. 
Forgive me for saying this, but that is a highly complex contrivance—[Interruption.] I am glad to hear that Committee members are struggling with it. The purpose of that highly complex contrivance is to get round the payment of tax and national insurance. 
This challenge started quite a long time ago. In 1995, the then Conservative Minister announced measures to stop a national insurance dodge that operated by paying employees tradeable assets. One year, a scheme was closed down in which an employee was given an interest in platinum sponge—I had to find out what that was; I am sure I still do not know. If all the platinum sponge had been in the employee's possession, and he had hung on to it, there would have been a commercial problem because it would not have been available. In fact, it seems never to have left either Schiphol airport or Jersey. There were also payments in fine wines—the list goes on. 
Let us be clear: successive Governments of both main parties have attempted regularly to make it clear that the payment of employment-related bonuses is subject to income tax and national insurance. That  seems a perfectly reasonable proposition—everybody else pays tax and national insurance on their income. I want to break the link, once and for all: sometimes, hon. Members seek to advance the idea that small businesses carrying out innocent activities and striving against the odds will be caught by the provisions. The provisions specifically target the disclosed schemes of which the Government have been made aware.

Philip Hammond: Will the Paymaster General give way?

Dawn Primarolo: I shall answer a couple more points. I shall be happy to give way after I start answering the amendments.
In moving the amendments, the hon. Member for Cities of London and Westminster (Mr. Field) talked about small-scale entrepreneurs. I say to him that the provisions are clearly targeted, as we shall see when we move through the amendments. Their purpose is to counter highly complex and contrived arrangements that aim to avoid tax and national insurance. Merely choosing one structure or form of share reward over another will not have any effect. Similarly, having an exit strategy will not be within the scope of the provisions. We are dealing specifically with the annual payment of bonuses that make us, as taxpayers, suffer from the reluctance of others to pay the tax and national insurance that they should. 
I am happy to give the hon. Gentleman the assurance he sought regarding employee share schemes and share option plans: they will not be affected. We continue to believe that they make an important contribution to the Government's productivity agenda. The Bill only targets contrived and highly artificial arrangements. 
After the announcement accompanying the pre-Budget report, David Cohen, a partner in Norton Rose company and chairman of the UK Share Plan Lawyers Group, said: 
''This measure can only be welcomed by all those who believe in the value of genuine employee share ownership.''

Philip Hammond: The right hon. Lady makes a persuasive case. No Conservative Member would defend highly contrived arrangements. Our concern is that well meaning legislation that is designed to shut down one problem might inadvertently inflict collateral damage. This is the point my hon. Friend the Member for Cities of London and Westminster was aiming at.
As the Paymaster General was speaking, it occurred to me that she was talking about large bonuses paid to very high earners in contrived circumstances. Has the Treasury considered a de minimis threshold for the provision, so that it would be clear that we were only talking about cases in which substantial amounts of money were involved?

Dawn Primarolo: It would be an interesting tax authority that sanctioned some tax avoidance schemes and not others, or a loss to the Exchequer as long as it was less than a certain amount. No, we had not considered a de minimis threshold. The prevention of avoidance and contrived schemes presents challenges to the tax authorities and to Finance Bill Committees  considering what are always complex reactions to complex arrangements. Such measures are continually debated in connection with Finance Bills. As we consider schedule 2, the hon. Gentleman will see that the purpose test is extremely tightly targeted. I will come back to the points raised by the amendments, and other points the hon. Gentleman made, but his hon. Friend wants me to give way.

Brooks Newmark: I feel that I should declare some sort of interest in that I have been involved in the venture capital industry for 12 years—although I hasten to add I have never invested in rhodium sponge or platinum sponge, which are used for catalytic converters. I do understand that.
One point that my hon. Friend the Member for Cities of London and Westminster has been trying to get across, particularly in relation to tax planning, is that when somebody is investing in a business it is important to ensure that the interests of employees—particularly key employees—are aligned with those of the investors or the owners of the business One thing that the Government should consider is the way in which those individuals are compensated through options or warrants: they should be viewed as co-owners of the business. My concern with the wording that I have seen is that such compensation will be captured as a form of earning that would involve PAYE and so on. 
The Government have gone a long way with measures such as taper relief, which was an excellent incentive for entrepreneurs to set up businesses. I congratulate Ministers on that—

Nicholas Winterton: Order. This intervention is becoming a bit of a speech.

Brooks Newmark: I am sorry, Sir Nicholas. My question to the Paymaster General is simply to ask her, when considering share option schemes, to align the rules with employees' ownership of those businesses, and not to capture that as some form of income. I am sorry for labouring the point.

Dawn Primarolo: The hon. Gentleman makes an important point about the protection of sanctioned, good and well used schemes, many of which are tax assisted, offered in the UK to assist companies in involving their employees in the profitability and growth of the company by the allocation of shares. That matter is not dealt with in the schedule, however. Although such schemes are important to the Government's productivity agenda, they are not disturbed by schedule 2. We are aiming specifically at employment-related income bonuses, which by no stretch of the imagination come in any of the categories identified by the hon. Members for Braintree (Mr. Newmark) or for Cities of London and Westminster.
The hon. Member for Runnymede and Weybridge spoke of the importance of not inflicting collateral damage; however, the amendments inflict collateral damage on the proposals in the schedule. I shall explain why. Not only are the amendments unnecessary, but they would lead to a significant loss  of revenue. Unless he pushes me, I will spare the blushes of the hon. Member for Cities of London and Westminster by not telling him exactly how much we estimate we might not be able to collect. 
Amendment No. 1 appears to be an attempt to restrict insurance contracts classed as securities to those used for avoidance. Although I am sure it is not the Opposition's intention, it would, by removing exclusions provided in the Bill, also catch contracts that we are satisfied pose no risk. 
Amendment No. 2 is unnecessary. The changes that we propose will ensure that the rules apply only to value passed through insurance contracts by way of employment reward—that is, the payment of an employment reward. When an insurance contract is offered to employees on exactly the same terms as to a member of the public, there should be no passing of employment reward. Employees in those circumstances will not be affected by the changes. Unfortunately, the amendment would create a safe harbour for those who provide insurance contract avoidance schemes as their main business. It would therefore provide a route through the legislation and lead to a loss. 
Amendment No. 3 reflects concerns about insurance contracts entered into before the measures were announced. The only arrangements that Her Majesty's Customs and Revenue has seen that involve the use of insurance contracts to deliver employment reward were designed to avoid tax and national insurance. We can find no other examples. That speaks volumes. Only value passed to the employee on contracts made after 2 December 2004 is caught. In my view, it is both fair and proportionate that income tax and national insurance be paid on such value. If the hon. Member for Cities of London and Westminster chooses to press the amendment to a Division, I shall ask my hon. Friends to oppose it. 
I have dealt with employers offering share-based incentives, with the date and with value passing through. The one remaining point for me to answer is the hon. Gentleman's argument that tax inspectors would somehow decide on a whim to use the legislation to challenge owner-managers. I have said that the approach to compliance in the area of employment products avoidance is being carefully managed. The schedule will ensure that the finite inspector resources are carefully focused through central direction and control and are supported by clear risk-based guidance on highly contrived and complex arrangements. Owner-managers of small businesses who are not using such contrived, complex arrangements will not be targeted for their efforts. 
I have made as clear as I can the target, the reason and the mechanism. I hope that I have allayed the hon. Gentleman's concerns. The amendments are fatally flawed and if he feels unable to withdraw them I will ask my hon. Friends to oppose them.

Mark Field: To paraphrase a discussion that took place this morning, I will be a hedger rather than a  ditcher. Much as I should like to be a ditcher in relation to the insurance industry, I shall not press the amendment to a vote I take some comfort in what the right hon. Lady has said.
The Paymaster General was guilty of some contrivance in her example, which was an almost ludicrously exaggerated case of a contrived means of bonus payments being harboured for the purposes of an investment bank.

Dawn Primarolo: I hope that when the hon. Gentleman uses the word ''exaggerated'' he is referring to the exaggerated attempts of those who designed that real, functioning scheme. I merely told him about it. Perhaps it will instruct him of the lengths to which a few very well paid people will go in order not to pay their tax and national insurance.

Mark Field: Sir Nicholas, you will be glad to know that contrivance is a two-way street. If the Minister is telling us that only companies that could be subject to the provision would be investment banks with equally contrived schemes, I would be entirely satisfied and there would be little point in debating the matter further. However, the Paymaster General will understand that we are trying to tease out the grey area. The example she gave is clearly from that grey area and was contrived wholly as a way of avoiding tax, but I suspect that that loophole was filled in some years ago with previous bits of legislation. It is not an example that anyone can be proud of it.
The reality is, of course, that smaller companies are not able to take complex tax advice and are often set up with an exit route in mind. In my experience, many entrepreneurs and small business men are, from the outset, looking to sell within three, five, seven or ten years; on that basis, they consider structuring their business in such a way as to minimise tax. There is concern that that would be deemed contrivance. Clearly, on one level it is contrivance in the ordinary use of the word, but it is obviously not contrivance along the lines of the investment banking example that the Minister quoted.

Dawn Primarolo: Would the hon. Gentleman concede that that course is still open if a business is planning an exit strategy and is using efficiently all the reliefs available to it through the legislative process that is clearly laid down? Is he seriously suggesting that businesses should use contrived schemes to avoid tax and national insurance in designing an exit strategy? Surely that is different. That is the point I am making. It is an important line not to cross.

Mark Field: It is indeed, however, we need a clear idea of exactly where that line falls. That is the core of the concerns expressed in this group of amendments and others. More clarity is needed. That is the main concern that has been voiced time and again from the various bodies that we have spoken to. The hon. Member for Bristol, West (Stephen Williams) will be happy to know that we have been in touch with a number of professional bodies—and I hope that I will not be speaking entirely verbatim from their notes at a later stage.
There is a great concern about the lack of clarity. Smaller businesses will suffer most from the risk that  the measure will be applied in an arbitrary fashion. Large organisations will be in a position to take detailed advice to ensure that whatever programmes they set up are unlikely to fall foul of even the most senior Inland Revenue inspectors. Smaller businesses may find that a relatively innocuous—indeed, uncontrived—scheme falls foul of the regulations.

Dawn Primarolo: I direct the hon. Gentleman to my statement to the House on 2 December 2004, which has been widely publicised and which ensures that there are no grey areas. It is absolutely clear in laying down the principles and what is expected. It should not be said that there is a grey area and that people will not understand. How can people not understand that if they receive employment-related income, it is subject to income tax and national insurance?

Mark Field: I am grateful that we have had at least some comfort in that regard.

Brooks Newmark: The Paymaster General makes an excellent point on contrivance and gave an excellent example of a riskless transaction. I followed what you said verbatim and whoever gave that example to you, it was an excellent one. However, my hon. Friend's point is that entrepreneurs who tax plan do so with risk capital, and it is risk capital that he is trying to discuss. The unintended consequences of your legislation might draw true entrepreneurs and people who take risks with their capital into it. I ask you to address that concern.

Nicholas Winterton: Before I call the hon. Member for Cities of London and Westminster, I must say that as much as occasionally I would like it to be, it is not my legislation. It is the Government's legislation.

Brooks Newmark: I am sorry, Sir Nicholas.

Mark Field: I hope that my hon. Friend the Member for Braintree will make further contributions in the correct form during the course of these debates. Without any further ado, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn

Mark Field: I beg to move amendment No. 4, in schedule 2, page 64, line 19, leave out from 'acquired' to end of line 24 and insert 'after that date.'.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 5, in schedule 2, page 64, line 25, leave out paragraphs 5 and 6.
No. 6, in schedule 2, page 65, line 1, leave out paragraph 7. 
No. 7, in schedule 2, page 65, line 9, at end insert— 
'431C Procedure for clearance in advance 
Section 431B shall not apply so as to treat an election as having been made for the purposes of section 431 if, before the issue of securities is made, the Board have, on the application of either the employer or the employee notified either the employer or the employee that the Board are satisfied that the issue of the securities is for bona fide commercial reasons and will not form part of any such arrangements as are referred to in section 431B.''.'.

Mark Field: We now turn our attention to a series of amendments relating to the category of restricted securities. The first pair of amendments, Nos. 4 and 5, would defer the time when the new legislation comes into operation. Many companies issue redeemable  shares for commercial purposes and have done so for many years. Redeemable shares are advantageous in that they can be repurchased and cancelled by the company with minimum formality, as the Paymaster General is aware. The retrospective changes to make them restricted securities will seem unfair to many employers and employees.
 Employers currently have an obligation to pay PAYE and national insurance contributions but are likely to face difficulties in recovering them when a tax charge arises. That might be because, for example, the employer does not have contractual right to recover either PAYE or national insurance contributions from an employee. A particular difficulty arises in relation to former employees, some of whom may have moved away and be uncontactable. 
The retrospective nature of the change means that employees have now lost the opportunity under ITEPA to make a section 431 restricted securities election in respect of the shares. If that opportunity existed at the time of acquisition, many employees would, as they currently do, make that election. As was the case when the 2003 Act was introduced, we believe that the Bill should allow a late section 431 election to be made following the changes. Any PAYE or national insurance contributions to the general employment remuneration tax would then be paid in the year in which the legislation received Royal Assent without any further interest. 
As paragraph 4(4) is currently drafted, it would appear that chapter 2 could be interpreted to apply to redeemable securities acquired before and after 16 April 2003, the normal cut-off date to which chapter 2 applies. I hope that the Paymaster General can give us some assurances on that, and will either say that this is intentional or clarify the situation. 
Paragraph 7 causes an election to be made at the time that the securities are issued. The result of leaving out that paragraph will be that the impact of taxing an employee at the time that the securities are issued will be similar to that of the US system, which has led to some perverse outcomes. 
 The Government need to recognise that companies may wish to issue securities with restrictions for valid commercial reasons. There will not be an issue of contrivance in that, as we have discussed, but that might be dependent on the quality of service as a ratchet to highly incentivise management, and continued employment is not necessarily a condition that could cause a security to be a restricted security. 
I know that there was a discussion about the large international investment banks during the last debate on the previous group of amendments, but for many privately owned companies there is a great problem of valuing securities that are subject to a restriction at the time of issue. 
There is also the risk that restrictions may never be lifted—for example, if they are based on profit targets that are not met. That will leave the employee with a charge to tax on income that they never got. Similarly, if the securities were to decrease in value, there is a risk  that an employee will be taxed ''as income'' and pay tax, but then suffer a potentially large capital loss on the subsequent fall in value—a loss that the vast majority of ordinary taxpayers would not be able to obtain value for, given that they already have an £8,000 annual exemption from capital gains. 
There is no mechanism in the Bill to deal with the potentially ruinous effect on employees of a precipitate fall in the share price, leading to a capital loss and a disproportionately high income tax liability, rather than capital tax liability. Therefore, amendment No. 6 seeks to limit the application of the new clauses to those circumstances where tax avoidance is intended, and to make it possible for taxpayers to obtain advance tax clearance so that they have the comfort of knowing that the Inland Revenue will not examine such transactions retrospectively—and, hopefully, for practices, to provide clarity on the operations of these provisions. 
In our view, general anti-avoidance rules only work when we have a transparent and general clearance procedure via the Inland Revenue. Commercial certainty demands that the Inland Revenue should be in a position to give detailed and accurate guidance to each class of taxpayer, corporate or otherwise, likely to be affected by a proposed change. That does not appear to have happened, which is why we have tabled our amendments. 
I turn to amendment No. 6. If the main purpose test is satisfied, proposed new section 431B of the Income Tax (Earnings and Pensions) Act 2003 deems that a restricted securities election is made. The main purpose test applies in relation to the avoidance of tax, which is defined as income tax and corporation tax, as well as national insurance. It is possible to see circumstances in which the main purpose test could catch situations—for example, where an employer structures a share plan with a view to obtaining a corporation tax deduction. I hope that we will get some guidance and satisfaction from the Paymaster General on this, because the deeming of a section 431 election could adversely affect innocent employees who had received no, or marginal, tax benefit. 
A number of examples have been given by some of the relevant professional associations, and I would like to highlight one of them. An employer has previously issued redeemable shares to employees. The employee will now automatically fall within the restricted securities legislation, and so be subject to income tax on a chargeable event, but the employer will not be entitled to a tax deduction under schedule 23 of the Finance Act 2003. To take advantage of the symmetry introduced under schedule 23 between the employee's tax position and the employer's tax position, the employer issues non-redeemable shares. Does that now fail the main purpose test? Surely the main purpose of the arrangement would be to incentivise employees. However, the use of non-redeemable shares in that instance would clearly be to obtain a tax advantage, to give the employer the symmetry to which I referred. If that were to fail the main purpose test, it would mean that the employee would then be  potentially liable to tax on the acquisition of the shares, which he or she would not otherwise have been. We believe that an exemption should be made in such a situation or an assurance be given by the Paymaster General for the record. 
One of the hallmarks of the Bill has been the uncertainty posed for businesses in their planning by the retrospectivity of so many provisions, and that applies in particular to several complex issues under schedule 2. That may have been unintentional, so it is all the more important that we can deal with such matters in Committee. The Government will argue that their provisions are not retrospective. However, certainty is key. People and businesses need to be able to plan in a stable environment. Changing the basis on which a transaction is organised will make it harder to plan. 
Several companies and employees could end up having to pay additional PAYE and NICs unexpectedly due to the change being made under the Bill. If taxation legislation is to change, it should be effected by a change of policy going forward. That is acceptable as long as the transactions that were undertaken in the past are protected. Such grandfathering procedure is seen as the norm. It is all too easy to be discouraged by measures being labelled as ''tax avoidance'' measures and it is easy to point a finger of blame at large investment banks with visible tax avoidance plans, as the Paymaster General has done in the debate. We fear that that would sell the pass on certainty and the stability that is provided by the rule of law. 
Our amendments would make the Bill prospective, not retrospective. In detailed comments that were submitted to the Inland Revenue as recently as 18 March, the Chartered Institute of Taxation expressed concern that the Bill would be retrospective. The measure is billed as having effect from 2 December last year, but the way in which the Bill is drafted shows that the measure will apply to all employment-related securities even if acquired before the date of the announcement. 
The definition of securities under part 7 of the Income Tax (Earnings and Pensions) Act is widened under section 424 of the Act to include certain instruments to prevent it from being used to pay tax-free bonuses. Among the instruments are redeemable shares. That is done by taking redeemable shares that were previously exempt out of exemption under paragraph 4(2) of schedule 2. We understand that such action is controversial, given that there are many occasions when redeemable shares are not used for the purposes of tax avoidance and what it amounts to is a blanket ban. The question to probe is why redeemable shares should not be subject to the same motive test as the conditions that are set out. 
The phrase ''something has been done'' is extremely broad language. It has been much criticised by not only the Chartered Institute of Taxation, but others. It seems to be taxation by feel. The measure is going down the road of arbitrary taxation. For example, is the decision not to declare a dividend in any one year something that has been done with the effect of increasing the value of the securities in question? I can  understand that many of the bond securities regulations proposed are based on a worry that, all too often, the tax tail is wagging the dog. We run the risk of falling into that precise trap and too many corporate decisions will be made that will hinge on whether activity can be defined as ''something being done''. We hope that this new term will be clarified in the frequently asked questions and the guidance, but to go back to an earlier point, that means that too many tax inspectors will be guided by the questions and answers drawn up by policy officers. In our view, it is inherently undesirable to have a system governed by Government guidance, which can change without warning and carries little weight in court. 
There is a real problem with uncertainty under this schedule, and I will be interested to hear what the Paymaster General has to say to pacify the concerns that we are addressing, which were raised by a number of interest groups. Setting boundaries by administrative guidance, rather than by law, is less than ideal at the best of times. We believe that the provision also potentially opens the door to the imposition of double taxation. 
I shall summarise our objections, which give rise to all four of the amendments in this grouping. Section 422 of the ITEPA introduces the restricted securities regime. Where employment-related securities, subject to restrictions, are required, income tax and national insurance charges can arise on the removal of the restrictions or on the disposal of those securities. The charge is linked, in broad terms, to the proportion in which the amount paid, or treated as paid for the restricted security, is less than the value of the security, had it not been restricted. This proportion on a later chargeable event is subject to income tax and national insurance. The purpose of the provision is to prevent the value of securities being depressed on acquisition, thus reducing the initial tax charge on the acquisition at an undervalue of securities obtained by reason of employment, and the restrictions being lifted subsequently without a charge arising. 
The provisions reduce the analysis of whether a profit from a share derives from employment to a numerical test based entirely on valuations. The lower the value by virtue of the restrictions, the greater the income tax charge. The taxpayer can, under section 431, elect that, in valuing the securities for the purpose of the initial acquisition, all or some of those restrictions be ignored. That increases the acquisition value for tax purposes, increasing the initial tax charge. It thus reduces the proportion subject to charge at a later event. We believe that the taxpayer should have that choice of election. It may be that the chances of a chargeable event arising are small. For example, the individual may hold shares subject to restrictions, and it may be that he or she is unlikely to dispose of his or her shares, and it may be unlikely that the restrictions will be removed. Therefore the election may not be made. 
Before 2 December last year, the taxpayer could be certain of his or her position. The numerical and value-based formula would indicate a likely tax charge. Now, if there is avoidance, no such certainty  exists; we fear that the taxpayer may face an unanticipated up-front tax charge on the value of the securities. It is all the more important that the taxpayer can receive tax clearance in those circumstances. The provision has been introduced to prevent avoidance, and that is fine, but now there really must be clarity for all taxpayers. 
I am sorry, Sir Nicholas; we have gone into some detail on this rather complex and technical subject, but I hope that I have been able to articulate my relatively straightforward concerns about the sheer uncertainty of the system and the concern that there will be taxation by feel. It is of key importance, particularly when we are trying to incentivise employees, that there should be certainty. I hope that we can have a meaningful debate on these amendments; they are key, and go to the core of many of our concerns about schedule 2.

Dawn Primarolo: I shall respond to the points made by the hon. Gentleman. He spoke about uncertainty and retrospection, the question of redeemable shares for commercial purposes and of restricted securities. It is interesting when listening to such debates to find out what Members are really talking about. With respect, the hon. Gentleman was talking about his fears, but they have nothing to do with the schedule and its clearly articulated intended results.
At the heart of the debate is the question whether taxpayers are fully knowledgeable about the schemes that they enter into and aware of what their purpose is. I shall deal first with the question of uncertainty and the purpose test. To those who say that the purpose test introduced uncertainty, I must tell them that the reverse is the case. I do not know how we can make it clearer, whether in statements to Parliament, during the Committee stage of a Finance Bill or in legislation, that those who enter into such contrived schemes know exactly what they are doing. They intend to avoid income tax and national insurance on employment rewards. 
The hon. Gentleman brings other issues into the debate—about how businesses function and about rewarding employees—but they are not relevant, and it is important to strip the argument back to the pertinent facts. Those who comply with their tax obligations will expect to pay the proper amount of income tax and national insurance on their employment rewards. On that subject, people can find certainty by reading the statement that I made at the pre-Budget report and considering it in the context in which it was made—which is that successive Governments over a considerable time have had to legislate in order to deal with the avoidance of income tax and national insurance on remuneration. At every point, when one scheme closes another opens. In the intervening period, the honest taxpayer who has discharged his obligations loses because such revenue is not collected. 
I have made it clear that the Government are determined to ensure that all employers and employees will pay the proper amount of tax and national insurance on the rewards of employment. I have said  that it is only right that everyone who should pay tax and national insurance does so, and that they should pay their fair share when it is due. The Exchequer is entitled to certainty on behalf of the taxpayer—certainty that taxpayers will pay their fair share—and, similarly, taxpayers who contribute their fair share have a right to expect others to do so. That is the central point of the schedule. 
On the question of retrospection, it is the practice of the Government, as it was of the previous Government—it is standard practice—to make anti-avoidance legislation effective from the day it is announced. The hon. Gentleman is wrong: the Government are not imposing a tax charge that could not have been anticipated by those affected. As I said in the statement that I made alongside the pre-Budget report on 2 December 2004, our objective is permanently to close those intricate arrangements that are designed to avoid income tax and national insurance on the rewards from employment. Those who make future attempts to frustrate this intention despite those warnings will now be well aware that legislation will be introduced to combat such avoidance. 
The hon. Gentleman asked about income tax and national insurance liability with regard to redeemable shares for commercial purposes and when the change in the treatment of restricted securities will apply. Liability to income tax and national insurance will not arise unexpectedly even if a redeemable security has been acquired before 2 December 2004. If further value is passed to the employee on or after that date—for example, when a restriction is lifted—I see no reason why tax and national insurance would be unexpected, given the statement and the specific technical and draft clauses made available at that date. 
It is difficult when theoretical examples are given. My officials have not been able to find a case in which redeemable shares were used for a commercial reason and in which tax liability would have been wrong or unexpected if a later event passed value to an employee. On the other hand, my officials have evidence that redeemable shares were being used for avoidance schemes in which the initial value was artificially depressed and a later increase in value was claimed outside the legislation. I am sure that no Committee member would want to let what is, in reality, employment remuneration arising on or after 2 December 2004 escape taxation, and we do not intend to do that. 
The many difficulties that the hon. Gentleman raised and suggested that others had raised with him about redeemable securities seem more academic than real. My officials have requested the production of examples of commercial damage, but none has yet been forthcoming. The department has clearly informed them on that. 
Taken together, the group of amendments would considerably weaken the anti-avoidance provisions. The hon. Gentleman has got the message that I am determined that schedule 2 and the arrangements should be in place. The amendments appear to stem,  as the hon. Gentleman said, from concerns that employees who acquired securities before 2 December 2004 as part of an avoidance scheme will not have provided for the tax and national insurance that the provisions now impose. I have covered that point. 
Amendment No. 4 reflects that misplaced concern by excluding redeemable shares and securities, used in avoidance schemes, acquired before 2 December 2004. As I have just demonstrated to the hon. Gentleman with examples and background, there is no real concern to be raised on the issue. If avoiders choose to carry out the arrangements that he suggests, I think it proportionate and fair that there should be a liability to income tax and national insurance. Those affected by the change will know exactly where they stand, because of the technical note as well as the statement. 
Schemes disclosed to officials were manipulating the rules that govern certain disposals of securities. By removing the anti-avoidance purpose tests to be applied to the disposals, amendment No. 5 opens the door to avoiders again. New section 431B ensures that securities used for avoidance cannot benefit from a reduced or deferred charge by imposing a full tax and national insurance charge when the employee acquires securities. By removing new section 431B, amendment No. 6 would allow the avoider to profit unfairly from the avoidance. 
Amendment No. 7 appears intended to limit a charge on acquisition when there is avoidance by introducing an advance clearance procedure to be operated by HMRC. I see no reason for the amendment. It is fundamentally flawed because amendment No. 6 would have removed the upfront charge to which amendment No. 7 would relate, and because it would allow either party to a transaction to seek and obtain clearance without the knowledge or consent of the other. 
My pre-Budget report statement made it clear where the line is drawn. Employers and employees using share remuneration schemes should expect to pay income tax and national insurance on the full value of the employment reward at the time it passes to the employee. Those who do so have nothing to fear from these changes and should have no need for a clearance procedure. What the hon. Gentleman is asking for is a clearance procedure, regrettably, for those who are trying to get round the legislation. I say as gently as I can that I am not about to concede that point. 
I that the hon. Gentleman will want to reflect on my comments. He can return to the issue at a later stage, but at this stage it might be wise for him to withdraw his amendments. If he chooses not to do so, however, I ask my hon. Friends to vote against them.

Nicholas Winterton: I do not know whether you are going to respond to those blandishments, Mr. Field.

Mark Field: I naturally respond to blandishments from both sides of the Committee, Sir Nicholas. I am glad that I am being treated gently. Perhaps I will be treated more roughly later on—here is hoping. 
We do not support anyone who does not wish to comply with their tax obligations. It is felt that the clearance scheme would be made redundant if we all knew that there was an entirely level playing field. Clearly, companies will employ securities experts for to discover exactly where the edge of the law is, and whether their scheme is within or outside it. 
The nature of this debate—and perhaps I have been as guilty as the Paymaster General—has almost been of two parallel lines, one of which suggests that Conservative Members are in favour of every investment bank ensuring that it can minimise tax for its employees. That is not the case. We have to recognise that these issues are not black and white. There are shades of grey, which we must debate as far as we can. 
I am sure that the Paymaster General did not intend to suggest that employee benefits advisers try to buck the system and ensure that less tax is paid. Inevitably, there will be structuring of transactions, particularly transactions with an international element. Tax-efficient vehicles will inevitably be created for such transactions. 
We are still concerned about the lack of certainty, and I fear that the Paymaster General has not satisfied us about retrospection. The mere announcement of a policy will not be enough. We have tried powerfully to make the case that certain categories of employees might lose out because of backdating. I accept that every announcement and every Budget will lead to more pressure being brought to bear to try to find schemes that avoid tax and are structured in such a way that income is seen to be subject to capital gains rather than employment taxes. 
We are now four hours or so into the consideration of the Bill. The time has probably come when we should put some of these matters of principle to the vote. I therefore ask that we do so in relation to amendments Nos. 4, 5, 6 and 7.

Nicholas Winterton: I note what the hon. Gentlemen says, but normally I would permit a vote only on the lead amendment.

Mark Field: We will do that.

Nicholas Winterton: I am grateful to for that guidance.
Question put, That the amendment be made:—
The Committee divided: Ayes 6, Noes 15.

Question accordingly negatived.

Mark Field: I beg to move amendment No. 8, in schedule 2, page 65, leave out lines 27 to 40 and insert—
'(3) Where subsection (1) does not apply by virtue of subsection (2) the market value of the employment-related securities is to be determined in each case as if they were immediately and fully convertible.'.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 9, in schedule 2, page 66, line 16, at end insert—
'(3B) (a) This subsection applies where subsection (2) of section 437 of this Act applies. (b) If on a chargeable event the amounts charged under the provisions referred to in section 437(1) because of the application of subsection (2) of section 437 and the amounts computed under this section (the ''original amounts'') exceed the amounts that would have been charged under section 437(1) and under this section had section 437(2) not applied, the associated person shall be charged on the lower of such amounts and any amounts overpaid shall be refunded, provided that if, on a later chargeable event, such amounts do not exceed the original amounts, the original amounts shall be due on the dates on which such sums were due and payable as if this provision had not applied.'.

Mark Field: I am glad that we had a close run battle on the last vote. This group of amendments deals with convertible securities. In summary we want to ensure that taxpayers who receive convertible are not ultimately taxed on a greater value than the true value.
The purpose of the convertible securities regime is to charge—to tax—convertible securities, but the basis of the regime is that the initial acquisition of convertible securities acquired by reason of employment should be charged on the assumption that they were not convertible. On conversion, therefore, it is effectively the value of the conversion right that is charged, and the market value of the securities into which the securities are converted is deducted from the market value of those securities before conversion, ignoring any conversion right. Also deducted is any consideration that might be paid for the conversion. It is to be treated as income and not capital in the first place. 
The regime has been used in the past, as the Paymaster General will be aware, for avoidance purposes. Accordingly a provision is to be introduced under which, if avoidance motives are present, the right to convert will not be ignored, but instead the convertible securities will be assumed to be immediately convertible. That will inevitably lead to a higher tax charge on the acquisition of those securities. However, we believe that it will be wrong for taxpayers to lose out if the notional calculation values prove to be above the conversion value ultimately, when any conversion takes place. 
The proposal for an amount to be repaid to the associated person may perhaps be argued to be objectionable, as the provision applies in the case of tax avoidance. However, we believe that by the time conversion occurs the purpose of the provision will have been served. The main purpose of the amendments is to clarify the proposed changes to section 437 of the Income Tax (Earnings and Pensions) Act and to amend the charge under section 440. 
We accept that the method is somewhat cumbersome, but it is surely better than the present method of creating taxable income gain, followed by  an unutilisable capital loss. Section 437 taxes the securities as though they had the market value that they would have had if they were not convertible. That is turned off if the convertible factor is intended for tax avoidance. Securities must be taxed as though they were immediately and fully convertible. 
I hope that we have made that case fairly clear. It was brought to us by a number of the professional bodies that are concerned about the regime for convertible securities. We look forward to hearing what the Paymaster General says about the amendment and about those aspects of convertible securities, as set out in the schedule.

Dawn Primarolo: I would not want to suggest for one minute that the Conservatives are siding with avoiders. I accept entirely that the purpose of the amendment is to probe the Government and to seek clarity, wherever possible, of our intention and how the legislation will operate. I have tried to give such clarity in laying out the objectives. Although I am speaking to the schedule, I say that because of the frustration to which the challenge we face gives rise, given the repeated actions by this Government and the previous Government to close a great deal of avoidance in a small area.
I will not be able to give the hon. Gentleman any comfort on this group of amendments. It is difficult to phrase amendments to the Finance Bill, but these amendments add complexity and, unfortunately, are in danger of rewarding avoidance. 
Amendment No. 8 has the admirable intention of replacing 11 lines of text with three. Unfortunately, the shorter wording will not work as intended. It could give rise to ambiguity and open the door to avoiders. The rules must cater for a variety of ways in which convertible securities can be used, in order to counteract avoidance schemes effectively. The rules are based on the notification schemes that are already in place. 
Amendment No. 9 is intended to allow those who have sought to avoid, using convertible securities, to pay the same tax as they would have paid if they had not used the avoidance scheme. I am not prepared to guarantee that avoiders using highly contrived arrangements will enjoy the same tax treatment as that given to genuine convertible securities. The avoiders have only themselves to blame if the consequence of attempting the avoidance in the first place is that they leave themselves liable to income tax and national insurance, and are unable to gain access to arrangements that would have otherwise been available had they arranged their affairs properly. 
Otherwise, the situation would be unfair on taxpayers who arrange their affairs according to the legislation. The hon. Gentleman is asking, in effect, for those who get caught out on avoidance to be able to say, ''Okay, we'll do it properly—now will you give us the relief?'' The answer is no. To paraphrase the eminent Lord Greene, those who play with fire should not complain when they get their fingers burnt. Perhaps it is best not to play with fire, but to follow  the legislation. I hope that the hon. Gentleman will not want to pursue his amendments. This is a fundamental point, and if he should do so I will ask my hon. Friends to oppose them. Avoiders have a clear choice. They can comply with the legislation, but if they do not, there are consequences. They cannot say, ''Well, we tried not to comply'' and when it does not work say, ''Can we pretend that we did it the right way?'' That is not acceptable.

Mark Field: It has been an interesting, albeit brief, debate on the issue. On the related matter of debt relief to third world countries, I would have a lot of sympathy with the Paymaster General's comments. I have doubts about these matters for the same reason: the issue of moral hazard, about which a very forceful argument was made. That is why she does not want those trying to avoid tax, as she would put it—perhaps I would say those who organise their affairs in a way that is unwound by the Inland Revenue—to have a second bite of the cherry and to benefit in the way that she mentioned. There is an issue of moral hazard and that argument has been made relatively powerfully.
I am sorry that in our attempts to précis the lead amendment by reducing it from 11 to three lines we decided to leave out the wrong eight lines.

Dawn Primarolo: Better luck next time.

Mark Field: Such is life, unfortunately.
I beg to ask to leave to withdraw the amendment. 
Amendment, by leave, withdrawn.

Mark Field: I beg to move amendment No. 10, in schedule 2, page 67, line 12, at end insert—
'(3) Subsections (1) and (2) shall not apply if the loan is repaid, in which case within one month after the repayment has been notified to the Inland Revenue any tax and national insurance paid shall be repaid.'. 
I am always worried when I read through my notes, which are written a few days before, and I start by referring to the straightforward purpose of the amendment. I hope that in articulating the amendment, the purpose will seem straightforward. 
 Our idea is to avoid what we would regard as a potential disproportionate tax charge for employees who receive loans from employers. Section 446S contains the provisions on loans to employees, which were set out two years ago when the regime was put in place. Those provisions provide for a tax charge equivalent to the benefit of the loans and the benefit of the interest if it is interest-free. There is a charge if the loan is released or written off, and the charges cease if a loan is repaid. That provision was introduced initially 30 years ago. 
 New section 446UA would, if enacted, provide that if a loan is made where one of the main purposes is the avoidance of income tax or national insurance, the employee would be charged to tax on the value of the loan. Although there is an immediate income tax charge where previously a notional loan would have arisen, now the loan remains so that the employee remains liable to repay it. That raises the concern that, save any relieving provisions, it risks creating a high marginal tax rate for employees, with additional national insurance due for employers as well. 
I hope that we have made a straightforward case on the amendment. We simply wish to avoid the potential for a disproportionate tax charge for employees who receive loans from employers that end up falling foul of the provisions.

Dawn Primarolo: Schedule 2 makes a change to section 446 of part 7 of the ITEPA to block a loophole that was being used to disguise remuneration as an instrument that purported to be taxable as a loan rather than employment income. The new section 446UA will apply only if a loan is provided to an employee via employment-related securities that form part of an avoidance arrangement. Under the new section, the employee will be charged to tax on the full value of the securities or acquisition. If in attempting to avoid full tax and national insurance, the promoter or user of an avoidance scheme has employed an unusual form of payment that has its own tax consequences, facing those consequences is part of the price that they must pay for indulging in avoidance activities.
To accept the amendment would be to condone—inadvertently, perhaps—avoidance activities. Those who are concerned about the application of the new section need take only one simple action: do not use avoidance arrangements. That has been my consistent attitude: I have explained clearly to Opposition Members the Government's determination to attempt to deal with this issue. If the hon. Gentleman wishes to press his amendment to a Division, I will ask my hon. Friends to oppose it.

Stephen Williams: I would like the Paymaster General to clarify something she just said because, unless I misheard her, I think she made an important statement about tax planning or tax avoidance. She said that the price that someone should pay if they go down that route is, effectively, to have to pay their tax twice, which is what this amendment seeks to avoid. Surely, the point of legislation should be to make people pay the tax that would be due if they were to follow the route the Government wish them to follow under the legislation, rather than to pay tax twice? Will she clarify her position on that?

Dawn Primarolo: Yes. We touched on that point in our discussion of the previous group of amendments. I made it clear that it would be wrong to allow avoiders who had been caught to say, ''Actually, we would like to do it legitimately, and by the way can we have access to the reliefs?'' They should have thought about that before they engaged in the activity, and in the sure knowledge of what that activity was. If there is more than one charge as a disguised remuneration passes through its convoluted arrangements, so be it. Those who play with fire cannot complain if they get burned. How can the hon. Gentleman justify a situation in which someone is found to have been engaged in an avoidance scheme, and instead of charging them tax and national insurance, which is what should happen, we say, ''Okay, we will pretend you didn't do it and give you the reliefs''? Before they enter into those arrangements, they must clearly understand the consequences; otherwise, it is simply not fair on taxpayers who comply with the law.

Mark Field: The Paymaster General's view is, ''Woe betide any taxpayer who dares to try to avoid tax; the risk of double-charge will be there.''

Dawn Primarolo: With the greatest respect, that is incorrect, and it is an unfair comment. We are talking about between £1½ billion and £2 billion in bonuses that are paid to high-earning people who have consistently since the middle period of the previous Government tried not to pay tax and national insurance on employment-related income. That is the only group of people we are talking about, and I think that all Committee members would agree that that employment-related income should be subject to income tax and national insurance. As it is that narrow group that we are talking about, I think that the hon. Gentleman's comments are unfair.

Edward Balls: My right hon. Friend should not let them off the hook.

Mark Field: I am not let off the hook at the best of times, I am sure.
Let me explain our concern about this clause. We are referring to loans, rather than highbrow, highly contrived, employment-related schemes along the lines that the Paymaster General set out earlier. We do not condone avoidance of a crass nature—or any nature.

Edward Balls: What avoidance do you mean?

Mark Field: Avoidance and evasion are two quite separate things. Legal avoidance is part and parcel of the tax system. One of the reasons we have ever-larger Finance Bills on a year-by-year basis is that we try to foresee ever more possibilities for avoidance. We have a concern in relation to loans: it is often employees who will suffer most if, having received what they thought was a loan on a preferential basis, they suddenly find that it falls foul of the legislation. However, it is not something we are going to die in a ditch for and I am happy to ask leave to withdraw the amendment. But if there is to be serious consideration in the future, representations related to injustices would have to be made to ensure that employees innocently taking up a loan, who then discovered that they had a large tax burden, would not be considered to be the evil tax avoiders towards which much of the Bill is geared. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.

Mark Field: I beg to move amendment No. 11, in schedule 2, page 67, line 38, at end insert—
'(5) Where subsection (4) applies, then the taxable amount determined in accordance with subsection (2) shall be reduced, where otherwise an amount may be subject to tax more than once, to such an amount to ensure that no part of the benefit is subject to tax more than once.''.'. 
I hope that the debate will be even shorter than the last one. The amendment was tabled to avoid the potential for a double charge. We appeal to the Minister's good heart for a belt-and-braces provision in this highly technical sphere on the risk of a double charge to tax. Under this Bill, certain amounts may be taxed more than once, hence our proposal to add this little subsection to take account of that possibility.

Dawn Primarolo: Let me try again to make it absolutely clear that the changes in chapter 4 are carefully designed to deal with the contrived arrangements that use employment-related securities to deliver what is in reality a bonus—a reward for employment—but without paying the appropriate tax and national insurance. Commonly, these complex avoidance schemes extract the bonuses in the legal form of a dividend which is subject to a lower rate of tax and no national insurance. The changes that the Government propose would mean that the bonus is subject to income tax and national insurance as an employment reward, but also because the avoidance scheme features remain liable to income tax as a dividend. That will provide a large disincentive to engage in avoidance; accepting the amendment would negate the purpose of the change and there would be no detriment at all.
As I said—I keep trying to focus on these highly complex schemes—if the promoters or users employ other forms of payment that have their own tax consequences they must accept those consequences. I am happy to reassure those who do not use avoidance schemes to avoid tax or national insurance that they will not be at risk of charge to income tax and national insurance under more than one heading, which is entirely appropriate. But I cannot concede the hon. Gentleman's point with regard to those who then still want to access those reliefs. It is fair that tax and national insurance contributions should be paid at the same rate on earnings whether they are paid using cash or employment-related securities. It is a complex arrangement that involves the use of unusual forms of payment, which would have their own tax consequences elsewhere as a result of the changes. The hon. Gentleman has not answered the question, ''Well, why should the avoider be allowed access?'', so if he does not want to withdraw the amendment, I shall ask my hon. Friends to oppose it.

Mark Field: I think that I have received as much satisfaction as I am likely to receive from the Minister on the matter, so I beg to ask leave to withdraw the amendment.

Nicholas Winterton: One of the best speeches.
Amendment, by leave, withdrawn.

Mark Field: I beg to move amendment No. 12, in schedule 2, page 67, line 42, at beginning insert—
'(1) After section 447 ITEPA 2003 insert— 
''447A (1) Section 447 shall not apply where the employee shows that the benefit arose from an ordinary investment transaction. 
(2) An 'ordinary investment transaction' means any transaction in securities regularly traded on an EEA exchange (being a market which appears on the list drawn up by an EEA State pursuant to Article 16 of EU Council Directive No 93122/EEC on investment services in the securities field) and any transaction in securities not so regularly traded where the following circumstances are present: 
(a) the securities were acquired for an amount (or the acquirer is charged to income tax on all or part of such amount under Chapter 1 of part 3) which was not less than their market value (as determined for the purposes of the Taxation of Chargeable Gains Act 1992), provided that in the information a purchaser may require there shall be included (if this would not otherwise be the case) any known or reasonably projected returns on the securities and any value the securities might acquire through the conversion or alteration of rights of those or other securities, always having regard to the possibility or otherwise of such conversion or alteration occurring; 
(b) other than the provisions in the constitution of the body issuing the securities, giving the holder the right to transfer if a majority decide to transfer their securities, there are no arrangements which give the holder a right to transfer his securities; 
(c) at the date of the acquistion there is no certainty that the holder of the securities will necessarily recover the amount invested in the securities, and there is not at any time any guarantee or indemnity from any third party of the amount invested in the securities or any income therefrom; and 
(d) the securities are securities acquired in a trading company or the holding company of a trading group (as defined in Schedule A1 of the Taxation of Chargeable Gains Act 1992). 
(3) Where in pursuance of this subsection a person furnishes to the Board particulars of a transaction relating to employment-related securities acquired or to be acquired by him or of any benefit anticipated or received by him in relation to any employment-related securities which may give rise to a charge under section 447, the following shall apply:— 
(a) if the Board are of the opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt notify to that person what further information they require for tax purposes and unless that information is furnished to the Board within 30 days from the notification, or such further time as the Board may allow, they shall not be required to proceed further under this subsection; 
(b) subject to paragraph (a) above, the Board shall within 30 days of the receipt of the particulars, or where that paragraph has effect, of all further information required, notify that person whether or not they are satisfied that the circumstances of the aquisition were or will be such, or that the circumstances giving rise to the receipt of any benefits were or will be such that any benefits anticipated or received ought not to be subject to the charge to income tax contained in section 447(1). 
(c) if the particulars, and any further information given under subsection 447A(4) with respect to any acquistion and benefit are not such as to make full and accurate disclosure of all facts and considerations which are material to be known to the Board, any notification given by the Board under this section shall be void. 
(d) if the Board notify the person that they are satisfied that the circumstances of the acquistion or receipt of benefits are such that any benefits anticipated or received ought not to be subject to the charge to income tax contained in section 447(1), section 447 shall not apply to that person in relation to those benefits. 
(e) if the Board notify the person that they are not so satisfied, the person may within 30 days of such notification appeal to the Special Commissions against such decision. Save for a notification by the Board referred to under paragraph (d), in no event shall the giving of a notification under this section prevent section 447 applying to a person in relation to any benefits received.''.'. 
Obviously, telling good jokes runs in the family, Sir Nicholas. 
We hope that the amendment would provide the taxpayer with some certainty by excluding ordinary investments from the scope of the provision. It would introduce a clearance procedure, which we believe to be of key importance. Given our earlier discussions and the replies that we have received from the Paymaster General, I am slightly intrigued to know, on what basis does she think that there should ever be a clearance procedure? If it is her view that the only people who would wish to adopt such a procedure are those who are engaging themselves in tax avoidance,  the argument becomes circular. Presumably, there would be no benefit in having a clearance procedure. 
However, we are keen on the amendment. We consider that paragraph 18 widens substantially the scope of the already wide benefits provision under section 447 of ITEPA. That was derived from a provision that was introduced in 1988. It was known originally as the ''special benefits provision'', the purpose of which was to charge to income tax benefits derived from shares that might be connected to employment, such as a deeply discounted rights issue on shares that are held by employees. The provision was widened in 2003 to cover benefits by virtue of the ownership of employment-related securities and has been deployed to charge to tax circumstances that, despite the breadth of chapters 2, 3, 3A and 3B of part 7, may fall beyond the scope of that which the Inland Revenue considers ought to be taxed. For example, there are ratchet arrangements whereby value passes into an employee's shares or shares decrease in value. The application of the provision to such circumstances has been subject to some doubt. We worry that the revised wording is much wider than before. Indeed, it is so wide that it appears to render redundant in many respects provisions that relate to restricted or convertible securities and capital gains tax for employment-related securities. 
The Law Society has prepared an example in its documentation. When articulating such examples, we can give an idea of what we are trying to achieve. Let us consider a business angel who, at some point in the past, has put money into a company and takes, say, 20 per cent. of the share capital. He also becomes a director and protects his interest by agreeing that his shares have class rights, and that his dividend and return of capital rights cannot be taken away from him unless he agrees. A decade or so down the line, the person sells the shares. The exemption under section 449 of ITEPA does not apply, so he has to be asked whether he has received a benefit in connection with employment-related securities. The phrase appears to be of such width as to cover the receipts gained from the sale in the example as well as receipts gained by reason of ownership. 
If it is for ordinary taxpayers, the breadth of the provision needs to be controlled in two ways. Surely there should be some sort of clearance procedure, particularly in this relatively fast changing area, and especially for those who have held shares for a considerable time. We believe also that there needs to be an exemption from the charge for ordinary investments when the securities concerned are employment-related. 
We understand that the Revenue is extremely reluctant to incorporate clearance procedures in legislation, but given the background of self-assessment explained earlier, it would appear to be a reasonable step in the face of such legislation. 
In summary, we seek through amendment No. 12 to provide safe havens for the taxpayer, but particularly those taxpayers who are entrepreneurs, people who  could play an important role in developing from scratch those businesses that had struggled earlier or are still at the fledgling stage. We are not after safe havens for all taxpayers, but for a specific class for whom ordinary transactions might otherwise be caught by the provision. It surely is not the Treasury's intention that the taxpayer in the example should be subject to the sort of punitive charge that would otherwise be put in place. I hope that the Paymaster General has some thoughts on the matter, or at least some guidance more generally on the clearance procedure.

Dawn Primarolo: The amendment has two legs. First, as the hon. Gentleman said, it seeks to provide a safe haven to ordinary investors from the scope of the revised chapter 4 provisions. Ordinary investors undertake transactions with an investment purpose. Those transactions should not deliver employment reward to an employee. The amendment is unnecessary; and in the complexity of its wording it could create legislative opportunities for people to exploit future avoidance schemes.
I reiterate what I said to the hon. Gentleman earlier, when I made it clear that the change does not bring a tax and national insurance charge on all benefits derived from securities. Benefit in the context of schedule 2 means employment reward, or the passing of value to the employee in return for the employee's labour. When investors are carrying out their normal investment transactions, the change will not affect them. Frankly, that statement clearly covers the point that the hon. Gentleman makes in the example. 
The second leg of the amendment introduces a clearance procedure for benefits received in relation to employment-related securities. I answer briefly, because I have said it a number of times already. A clearance procedure is not necessary. The statement of 2 December 2004, which was made alongside the pre-Budget report, made it clear that in the area of employment rewards, people can find certainty by considering the statement in the context in which it was made, which is that legislation by successive Governments over a number of years deals with the avoidance of income tax and national insurance on remuneration in that narrow area. 
Clearance is not necessary. All the information is in the public domain; it is for each taxpayer to comply with it. This is not the time for a debate on whether clearance should exist or about its purpose, but clearance is not necessary in this case because the statements are clear. The taxpayer should be clear about our intentions from the Bill. I therefore ask the hon. Gentleman to consider withdrawing the amendment. If he wishes to press it to a Division, I shall ask my hon. Friends to oppose it.

Mark Field: The Paymaster General will be relieved to know—probably no less relieved than I am, looking at the somewhat depleted state of our Benches—that I will be happy to withdraw this particular amendment.
However, there is a worthwhile discussion to be had at some point on the whole issue of the clearance procedure. The Paymaster General may well be right when she says that here and now are neither the place  nor the time for that particular discussion. I am glad we have had a chance, however, to at least put some of these concerns on the record. Insofar as the business angel appears and potentially might lose out, I hope that the words of the Paymaster General will have gone some way to ensure that any loss is minimised. I beg to ask leave to withdraw the amendment. 
Amendment, by leave, withdrawn. 
Question proposed, That this schedule be the second schedule to the Bill.

Mark Field: With your indulgence, Sir Nicholas, we have a brief stand part debate on schedule 2. I wish to open it with a side discussion, perhaps even a discussion on the clearance procedure. This might be that appropriate moment.
Above all, however, Conservative Members are keen to know what this Government's policy on equity-based remuneration is. We have had a clear statement—dare I say it, five or six times over—from the Paymaster General, in forceful terms, that the policy of the Government is clearly to stamp down hard on tax avoidance and any antics by investment banks to deprive the taxpayer and the Revenue at large of many hundreds of millions of pounds on an annual basis. We wish to have some idea of where the equity-based remuneration policy is. 
Do the Government wish to encourage the giving of greater incentives to staff together with the Chancellor's much-lauded 10 per cent. tax on capital gains for individuals? All Conservative Members would support that. I personally was someone who benefited in part—but not from 10 per cent.; it was 20 per cent. when I sold my business within a few months of entering this place four years ago. None the less, we are concerned; if tax and national insurance contributions are all taxed in the way that has been suggested, what would be the purpose of the 10 per cent. tax on capital gains if it is to become increasingly restricted? 
There is a particular concern that, whereas the capital gains benefits work very well for entrepreneurs, many employees would potentially find themselves falling foul of much of this tax avoidance. What forms of tax planning do the Government accept as valid for companies who wish to incentivise their employees by giving them a long-term equity stake in the business, especially those who work for organisations that are not quoted companies, such as mutuals and partnerships? Do the Government want prescribed share option schemes to be the only valid mechanism by which companies can so incentivise their employees? That is what the current tax law, which is becoming increasingly narrowly focused, is saying. 
I will not try your indulgence any further, Sir Nicholas. I hope that we can at least engage in a brief discussion, although I accept that we have had quite a detailed discussion on a number of specific issues in schedule 2 during the course of the debates on the amendments.

Rob Marris: The hon. Gentleman has struggled hard on this, and I  take my hat off to him. It is a very complex area, but I would like, in my own small way, to try and simplify it for him. I draw his and the Committee's attention to the explanatory notes to this schedule, paragraphs 61 and 62. If you will indulge me, Sir Nicholas, it is not a long quote, but I will read it. It is to do with:
''Part 7 of the Income Tax (Earnings and Pensions) Act 2003 . . . which was amended by the Finance Act 2003 to make the regime fairer, provides the income tax rules in cases where securities, interests in securities or securities options are acquired in connection with employment . . . The amendments made by the Finance Act''—
it says 2003, but it may mean 2005— 
''are designed to ensure that all of the value received by way of remuneration in the form of shares or other securities is subject to income tax and NICs at an appropriate time.''
That is the crux of it. 
The hon. Member for Cities of London and Westminster, when he was speaking to this stand part debate, talks about companies incentivising their employees and so on. There are different ways to incentivise an employee; a good way—the first way—is to pay him. I am not ruling out others, but I start with that one. That is the way most people earn their living. They are not self-employed: they are employees. They do not have share options or shares in the company or partnership for which they work; they get paid. On that pay, they are charged pay-as-you-earn contributions, income tax and national insurance contributions. Why should an employer pay an employee? Because it incentivises them to work, leaving aside the arguments about the minimum wage. 
I understand that an employer—here we get on to the schedule, Sir Nicholas—may wish to bind the employee more to the company by giving him or her a practical sense of ownership, in the literal sense, and by giving them some shares in that company, or options on shares. It is often options on shares for the richer, but not always; some low-paid people get options on shares. That is an incentive for that employee to work. Every hon. Member would agree that such incentives can be helpful for a company. 
If a company chooses to incentivise its employees in that way, both the company and the employee should recognise that there is a price to be paid. There is, potentially, tax and national insurance to be paid. That goes back to what my right hon. Friend the Paymaster General said: in many, but not all, of these cases it is difficult to concede that the employee does not recognise that they are getting something from the boss to incentivise them to work. That something has pound signs attached to it, although it may be a share certificate rather than something that they can trade in at the grocery store or whatever. Most employees expect that when they get something from their employer with pound signs attached to it, they have to pay some tax on it. It really is as simple as that. 
Although there are very complex schemes that some companies go into to incentivise their employees, to me—and I am a solicitor by background, not an accountant—it comes down to pay for work, and we expect to pay tax on pay for work. I remember when I was employed, before I became a partner in a law firm, we had company cars. Without being big-headed, I have to say that I was probably the only employee who  bothered to understand the company car tax regime—what a surprise. My fellow employees used to come to me and say, ''If I get a car with this specific cubic capacity, what will the tax be?'' And then we would get on to the tax on fuel benefit in kind, and how much private use would be allowed, and a fuel card could only be obtained from the employer and so on. All those employees took as their starting point the fact that there was a price to be paid, although they did not know all the finer points of it. The price to be paid is called tax; they all knew that. People know that. 
The amendments seek to undercut the thrust of schedule 2, which is to clamp down on artificial manoeuvres—tax avoidance manoeuvres—where those engaged in them know that there is tax to be paid, and are trying to get around it. I laud the Government's attempts.

Brooks Newmark: I do not want to get too philosophical, but as a student of Marx, I should say that Marx talked about the alienation of the worker from capital. The amendments try to address that; we are trying to encourage workers to buy into the companies of which they are becoming part and parcel. The hon. Gentleman discusses the importance of paying employees fairly and so on to incentivise them, and I totally agree with that; but part of being in the 21st century is accepting that capitalism, fortunately or unfortunately, is what makes the world work. Historically, evidence shows that part of the incentive scheme, in order to incentivise employees and improve companies so that they move forward and make profits, is to give employees shares. The hon. Gentleman seems to believe that becoming a stakeholder, which the Chancellor has tried to encourage as well as the Prime Minister—they have both said that we are all part of a stakeholder society—and which I agree with—[Interruption.] It is an intervention; I apologise again. Would not the hon. Gentleman agree that part and parcel of improving companies' profitability is encouraging employees to become shareholders of those companies and rewarding them accordingly?

Rob Marris: I do not think that I said to the Committee. I would not tell the hon. Gentleman that I am against share ownership schemes. I am fairly sure, looking at the record, that I did not say that. I said that most employees, albeit in many cases in an inchoate fashion, know that there is a price to be paid, and that price is tax. The hon. Gentleman tempts me to comment on Marx—I crave your indulgence, Sir Nicholas—but he should be wary of doing so. He seems to be advancing the proposal that it is a good idea that employees have shares, but if he reads Marx carefully, he will be aware of the theory of the declining rate of profit, whereby the employees will get less and less on those shares, so it might not be such a good idea for capitalists like him—but I digress.
I have been at pains to make the point that the thrust of the Conservative party's amendments seems to be: ''Yes, we're against tax avoidance and platinum sponges, or whatever we call the things for the catalytic converters, but really let's try to get a few back in through these amendments.'' That is what it  looks like to me. There is a price to be paid and that price is tax. Schedule 2 seeks to address that, I think it does so well and I urge hon. Members to vote in favour of it.

Dawn Primarolo: Let me respond the points made by the hon. Member for Cities of London and Westminster and my hon. Friend the Member for Wolverhampton, South-West. The Government have consistently supported employee share ownership, which is why we have company share option plans, share incentive plans, save as you earn and enterprise tax incentives, which are all tax advantage schemes designed to assist employees. The schedule shows that the Government are not prepared to allow those tax advantages to be accessed through the back door of avoidance; they are in place and will remain there, they are not affected by the schedule, except that they are protected in that they will be used as they should be and the avoidance will be dealt with. I commend the schedule to the Committee.
Question put and agreed to. 
Schedule 2 agreed to. 
Clause 13 ordered to stand part of the Bill.

Clause 14 - Income tax deduction for payments to organisations

Question proposed, That the clause stand part of the Bill.

Mark Field: Sir Nicholas, clause 13 might have been lucky for you, but I am afraid that clause 14 will not be so lucky.
I should like to say a few words on clause 13 first, if I may. We welcome the Government's commitment to consulting the scientific research organisation industry on the manner in which the regulations are dealt with and we endorse the need for some clarification in statute. 
Clauses 14 and 15 are designed to ensure that payments by the taxpayer to such organisations as are prescribed in clause 13 shall be tax deductible for income tax and corporation tax purposes. I have two questions on which I should be grateful for an answer from the Economic Secretary. First, why cannot the particular form of scientific research organisation be determined in this Finance Bill, notwithstanding the process of public consultation that is being undertaken? Secondly, what representations have the Government received that have persuaded them to amend the terms of the Income Tax (Trading and Other Income) Act 2005 so soon after it has been enacted? I appreciate that there is sometimes schizophrenic activity on the part of the Treasury, but it seems incredibly quick to have enacted a piece of legislation only a few months ago and now to seek to amend its terms in this way.

Ivan Lewis: To respond directly to the hon. Gentleman's argument, there is consensus on the desirability of incentivising investment in science. This part of the Bill is designed to align the rules with our tax credits with which we are incentivising that investment. 
The hon. Gentleman asked for a definition of scientific research organisations. I understand that there are only nine SROs in the country. Historically, the Department of Trade and Industry has been responsible for them and we do not believe that it would be possible or desirable to be prescriptive about their definition at this stage in their development. Because the number of those organisations is relatively small, so we are anxious to consult them in some detail to ensure that we get the regulations absolutely right. We therefore did not think that it was appropriate in the Bill to be prescriptive in our definition. 
Mr. Field rose—

Ivan Lewis: I shall give way to the hon. Gentleman so that he can remind me of the other point that he was making.

Mark Field: In fact, I was grappling with my papers and am only glad that I did not pass them to the Clerk. The other question that I sought to ask in a characteristically articulate way was about the representations that the Government had received that had persuaded them that the terms of the 2005 Act should so quickly be revised.

Ivan Lewis: I was just testing the hon. Gentleman. It is a consequential amendment to ensure that the position of contributors will not be unchanged. There would be an inconsistency if we did not make the change at this stage and individuals and corporate donors to SROs would be left in an invidious position. So in changing the rules to benefit the organisations, it is entirely right that we clarify and simply the rules that apply to individuals and companies that receive tax deductions as a consequence of their donations to those organisations.
Question put and agreed to. 
Clause 14 ordered to stand part of the Bill. 
Clause 15 ordered to stand part of the Bill.

Clause 16 - Open-ended investment companies

Mark Field: I beg to move amendment No. 13, in clause 16, page 14, line 39, at end insert—
'(4) In relation to an open-ended investment company mainly invested in interests or rights over land, the rate of corporation tax for the year 2005 and subsequent financial years may be determined under Regulations made under section 18 of this Act to be nil.'. 
Chapter 3 relates to authorised investment funds. As the Committee knows, we discussed these matters in some detail on the Floor of the House, at least in relation to clause 18, which had several other aspects that cover the debates relevant to clause 16. I tabled the amendment because it deals with an area that was not discussed in such great detail. 
Overall, the funds industry does not want to alter many of the clauses, but it would prefer that the proposed changes be made by primary legislation and not by statutory instrument. The Association of British Insurers has expressed several principled concerns in its representations to the Government. The ABI is concerned that the Government propose to  extend significantly the power that allows them to alter critical areas of the taxation of life insurance companies by regulation rather than by primary legislation. It has expressed strong reservations about the proposals. As a general point of principle, the Conservative party accepts the ABI's view that it is inappropriate for changes to such a significant element of the tax regime for life insurance to be made simply by regulation. The worry is that the clause allows changes to be made without proper consultation or parliamentary scrutiny, and could result in badly thought through and unfair proposals becoming law. We strongly believe that significant changes to tax legislation should be made only by means of primary legislation. 
The Government intend using their proposed regulation-making powers to address what they see as flaws within the current system. Again, the ABI accepts that the legislation needs to be reviewed. However, we believe that such a review should be part of a wider review of corporation tax reform in relation to the taxation of life insurance companies—we understand that that is scheduled for some time next year—rather than as a quick fix within the Bill. Without repeating the debate on schedule 2, there are also concerns that aspects of the Bill will have retrospective effect. 
Amendment No. 13 addresses some of the issues that we discussed on the Floor of the House on 13 June. It should be noted that, despite several announcements by the Government on introducing tax legislation to give effect to real estate investment trusts, such legislation has not been introduced in this Finance Bill. That is due to problems involving the current method of taxation of overseas landlords, where rents paid to them are subject to a 22 per cent. withholding tax, except where the landlord has the prior agreement of the Inland Revenue. The concern is that REITs will, in effect, escape such a tax on paying distribution to an overseas landlord. However, many other countries have REITs and tax regimes for them. There is a genuine concern that the delay is causing the property fund industry to locate in countries other than the UK. 
I am sure that the Minister will have thoughts on a solution. We have tried to highlight the problem that prevents such legislation being introduced following suitable consultation. The reason why the European Union has tried to impose a different regime is that the UK proposals are likely to be ruled illegal under EU law by the European Court of Justice. Our amendment enables one of the suggested solutions to be that tax is charged at nil in the REIT, with greater tax then due to arise on the investor in the REIT if it is so chargeable to tax. 
Clause 16 on open-ended investment companies effectively transfers into statute the statutory instrument laid when OEICs could first be established under UK law. That should mean that OEICs will be taxed in the same manner as unit trusts: in other words, on income at 20 per cent., rather than in the manner applicable to other companies. 
I hope that the Minister will be able to give some guidance on the Government's thoughts on clause 16.  We could, I know, repeat much of the earlier debate, but many of the concerns that were set out on the Floor of the House on 13 June remain entirely relevant. There is grave concern within the insurance industry that much of the legislation in clauses 16 to 23 is being rushed through the House at a time when a little more sober reflection, given the timetabling of other amendments, would have made a certain amount of sense. I hope that the Economic Secretary has some thoughts on the matter.

Christopher Huhne: There is a problem with both the amendment and the clause, and I should like to give the Economic Secretary an opportunity to address it. The Treasury's long-standing position is that there should be tax neutrality between different investment vehicles. The provisions apply only to OEICs and authorised unit trusts. I mentioned on Second Reading that they do not apply to the main competition to those vehicles, namely closed-end funds or investment trusts. One result will be to widen further the tax advantages enjoyed by OEICs and AUTs compared with ITCs, particularly when investing in bonds. I should like the Economic Secretary to take this opportunity to explain why the Treasury has not addressed that issue in making these changes. Perhaps it is due to the lack of consideration that the hon. Member for Cities of London and Westminster has just described.

Ivan Lewis: The hon. Member for Cities of London and Westminster asked: why now? Why are we rewriting the regime in this Finance Bill? It is important that we do because we must respond to recent regulatory changes for authorised investment funds. In the circumstances, it makes sense to rationalise the existing regime at the same time.
The Financial Services Authority updated the rules governing authorised investment funds in April 2004. In subsequent consultations to ensure that tax does not hinder the wider investment strategies now permitted by the FSA, a number of respondents mentioned the difficulties of dealing with two separate bodies of legislation—one in primary and the other in secondary legislation. In response to those concerns, the details of the rules applicable to both AUTs and OEICs will in future be in regulations. That will also allow a quicker and easier response to any future changes introduced by the regulator. 
It is important not to go over old ground in the REIT debate. We had a long debate on the Floor of the House about REITs. We made clear our intention, if we are able to resolve the technical problems, to introduce proposals in the Finance Bill of 2006. It would be entirely wrong to bring forward now proposals on REITs that we were not happy with and that might lead to an unsatisfactory outcome. We are actively working with stakeholders and specialists to ensure that the proposals that we make on REITs are appropriate. If we introduced measures that ended in unintended and undesirable consequences, we would be subjecting ourselves to considerable and justified criticism. 
I accept that it is important that we get the REIT issues resolved, but it is also important that we recognise that serious outstanding obstacles have to be tacked. That is accepted by the experts in the field.

Richard Spring: The Minister should examine the experience of other countries. The huge obstacles that Ministers keep referring to have been dealt with by other countries, including other European Union countries and others. Business is being lost to this country. Here we are dealing with legislation to prevent the Exchequer losing money through avoidance, which is one thing, but a problem has been created through delay, which is impossible to understand. As has been publicly stated, business has been taken abroad, because of the Government's unwillingness or incapability to act.

Ivan Lewis: It is extraordinary to hear the hon. Gentleman referring to the EU and other EU countries as though we should follow their model. That has not been the position of the Conservative party on any issue that I can recall.
 It is important that we get the reforms to the REIT regime right and that they are consistent with our objectives, which are that the reform must be at no overall cost to the Exchequer and that we continue to collect a fair share of tax from the property sector. We cannot apologise for those objectives. They are entirely proper. I accept the importance of making progress, but we must ensure that we get the provisions right. 
The hon. Member for Eastleigh (Chris Huhne) asked specifically why the reforms are not being extended at this time to investment trust companies; I think that that was the specific example he gave. He will acknowledge that they are not authorised investment funds and, although they offer an alternative to investors wishing to obtain a wider exposure to the market than just investing in a single share, they are not regulated by the FSA for consumer protection or for eligible investment strategies, as retail collective investment schemes are. The difference between investment trust companies and authorised investment funds therefore consists of more than just the ability to make an interest distribution. Wider issues need to be considered before contemplating any change to the tax rules concerning distributions to investors. 
We have put out a consultation document relatively recently on the way that investment trust companies are regulated. We want to study the results of that consultation carefully before we make any final decisions. The Chancellor made it clear in the last Budget that the Government recognise the potential benefits of simplifying and modernising the taxation of pooled investment; that includes investment trust companies. We continue to invite views on whether radical reform, similar to what is happening in relation to pensions, is viable.

Christopher Huhne: The Minister seems to be getting into a byway that is not relevant to the Finance Bill. The issue is not whether investment trust companies are regulated in the same way as authorised investment funds, but whether, as an alternative to those funds, they benefit from tax neutrality. I invite the Minister to  state whether he regards it as sensible to apply to those competing vehicles the principle that there should be tax neutrality as between investment in an investment trust and investment in an authorised investment fund. Will he make a commitment to bring forward proposals, if not this year, then in a future Finance Bill, to put those alternative investment vehicles on a level playing field?

Ivan Lewis: I have made it clear that there are reforms that we want to make at an appropriate time, but they must be consistent with the objectives that we have set out. We do not feel that it would be right at this stage, when we have just begun a consultation process, to include relevant proposals in the Bill. However, if, as a consequence of the consultation and of studying the implications of measures in the Bill, it becomes apparent that it would be right, in order to achieve a level playing field, to legislate in that context, of course we would take a sympathetic view. However, we need to be persuaded that that is appropriate.

Mark Field: The Economic Secretary has referred several times to the consultation process. Has he any idea how long it is likely to continue and when it is likely to end? As my hon. Friend the Member for West Suffolk (Mr. Spring) has pointed out, much of our business is floating out of the door, away from the UK. It is therefore all the more urgent that we make progress.

Ivan Lewis: I simply do not accept that there is empirical evidence for the suggestion that investment is flowing out of the country. The consultation that I referred to has recently concluded. We are now analysing the responses. Having done that we shall consider the appropriate reforms. We shall do that in the next few months, and if appropriate—if, having discussed the matter with the relevant stakeholders, we come to a sensible conclusion that is consistent with our objectives—I imagine that we shall consider including in the next Finance Bill appropriate clauses to answer the concerns of hon. Members. With that, I hope that the Opposition will withdraw the amendment.

Rob Marris: Perhaps I have misunderstood the amendment. I am not a financial expert, but, as I understand matters, authorised unit trusts currently pay tax in the lower band for income tax, which is 20 per cent. Open-ended investment companies, as companies, would pay corporation tax at 30 per cent., but under the legislation they will in fact be paying it at 20 per cent. Amendment No. 13 says that if such  companies were property funds, the rate of tax could be nil—not only for this tax year, but potentially for ever. That strikes me as absolutely extraordinary. Open-ended investment companies get a tax break from 30 per cent. down to 20 per cent., but if they invest mainly in property, the hon. Member for Cities of London and Westminster—perhaps because of his surname—wants to make it nil. I urge Committee members to vote against the amendment.

Mark Field: It is rather ironic that the Conservative Member of Parliament with the most urban seat should have the most rural surname. If the good burghers of Wolverhampton, South-West ever regain their senses at a future general election, the hon. Member for Wolverhampton, South-West will have a sure-fire employment opportunity as a drafter of explanatory notes, if nothing else.

David Ruffley: And nothing else.

Mark Field: The explanatory notes are good anyway; we cannot complain too much. I will be happy to withdraw the amendment, although there is some concern that there is a complacency, which I know has been debated at length on the Floor of the House.

Brooks Newmark: Does my hon. Friend not agree with John Gellatly of Merrill Lynch Investment Managers? He is quoted on the company's website as saying that there is now more than £3 billion of listed property trusts in Guernsey. Is that not potentially a loss of revenue to the UK Exchequer?

Mark Field: I entirely endorse the gospel according to Mr. Gellatly of Merrill Lynch.
There is scope, although obviously not now, for a much wider debate about property taxes. I hope that we will have a chance to have it during our consideration of this Bill because there are grave concerns that we run the risk of disadvantaging much of the UK if we move ahead with the Europeanisation of our property taxes, although that may well be a desire of the Exchequer. However, three minutes to 7 this evening is not the time for that debate. I beg to ask leave to withdraw the amendment. 
Amendment, by leave, withdrawn. 
Clause 16 ordered to stand part of the Bill. 
Clauses 17 and 19 to 23 ordered to stand part of the Bill. 
Further consideration adjourned.—[Mr. Watson.] 
Adjourned accordingly at Seven o'clock till Thursday 23 June at fifteen minutes past Nine o'clock.